Category: Sop

When I agreed to take on this project the possibility it may fail crossed my mind, after all, the sum total of our collective experience on blogger could fit in a thimble. Motivated by those who are actively working against the people on the coast getting a fair shake from their insurer we began undaunted by the long odds that we could actually interest a potential readership in this very complex issue.

While the spillover from the “insurance wars” captivates the nation we continue to stick to our knitting of educating the public on the very real problems exposed by Katrina’s wind and water over two years ago. Though we have not been burning up the proverbial commentary meter, Coastal Cowboy summed up our goal best early on, “The measure of our success will not be the amount of comments we get or the number of readers we attract, rather it is having the RIGHT folks reading us.”

By that measure our first month online is a resounding success as we’ve attracted readers from 3 foreign countries as well as from across the US. We count people from diverse places like Washington DC, Lincoln Nebraska, and Bloomington Illinois to small towns like New Albany, Mississippi among our readership. We hope to continue educating all on our perspective, that of ordinary men and women here on the coast who struggle with the costs of insurance everyday and the related local fallout from insurance companies refusing to honor their contracts on the coast post Katrina.

Fourth District U.S. Rep. Gene Taylor says he will fight again in 2008 for a bill to add wind coverage to federal flood insurance for protection from another hurricane like Katrina.

But, if so, he’s going to have to find an ally in the Senate.

The House bill, which Taylor co-sponsored, with the support of House Speaker Nancy Pelosi, D-Calif., added wind coverage to the National Flood Insurance Program. But the wind coverage provision was not included in a bill the Senate Banking Committee approved, The Associated Press reported. Sen. David Vitter, R-La., has blocked a vote by the full Senate because optional wind coverage and higher coverage limits were not included.

The Senate bill was sponsored by Banking Committee Chairman Chris Dodd, D-Conn., and Richard Shelby, R-Ala. Taylor said he can understand Dodd’s objections because of the insurance interests headquartered in his state. “Shelby is the one I keep scratching my head over,” he said, because of his constituents in coastal Alabama.

Republican Mississippi Sen. Thad Cochran supports the multiple-perils bill. He should lobby his colleagues for it. Democratic Sen. Hillary Rodham Clinton had introduced a similar bill in the Senate.

Taylor’s bill had already been massaged by the House to meet potential objections. Pelosi led a 13-member congressional fact-finding mission to the Coast in August. Listening to victims at a town hall meeting in Bay St. Louis, she pledged to help, but even she acknowledged: “We’re up against a mighty force (lobbying efforts of the insurance industry).”

Pelosi helped push Taylor’s “multi-peril” Flood Insurance Reform and Modernization Act of 2007 through the Financial Services Committee in July, and it went to the Senate with full House backing as HR3121. It would allow flood insurance policyholders to purchase wind insurance or as a stand-alone policy, and increases limits.

Catastrophic insurance for hurricanes remains a need for U.S. coastal areas nationwide, so it could – and should – be resurrected. Mississippi is not alone in facing higher insurance premiums, if it’s available.

As has been noted in www.clarionledger.com/forums under “Katrina-related issues,” home insurance rates are skyrocketing in all the nation’s coastal areas. The experience with Katrina on the Coast, still waiting for insurance and government promised relief, is evidence for HR3121.

As one reader wrote: “My husband and I chose to stay here, even though we lost everything we owned, because of his business. It cost everything we had and then some to build a new home, miles away from the water and insurance was still astronomical. But … if we waited for progress to be made down here, we would be dead.”

HR3121 should not be allowed to die. The very life of the Coast could be at stake.

At the Mississippi Insurance Forum we have identified two main problems with Property and Casualty insurance in the aftermath of Hurricane Katrina:

1. Unfair and predatory claims handling as demonstrated by the unrefuted fact patterns in cases like McIntosh v. State Farm where State Farm threatened to fire their own engineers who found wind damage as the primary cause of the loss rather than flooding. State Farm actually ordered additional engineering reports until they received the “answer” they requested in such cases.

2. A lack of transparency in insurance product pricing, especially in the area of reinsurance.

While we will tackle both issues its worth noting the first has already received a fair amount of press attention while the second has not been addressed in detail except at a few web sites like this one. I suspect the reason the economic concept of market transparency has received such little attention is because it is complicated to explain and understand. I endeavor with this entry to start our readership along the path to understanding these important yet basic economic principles.

First we need to start with the decision to purchase a multi-peril homeowner’s policy and examine the criteria consumers use when selecting an insurer. Think about it, how did you choose your insurance agent and insurer? Did you let your fingers do the walking or perhaps you received a referral from a friend of the agent? Or maybe we thought the ad we saw during the football game was good and we feel safe knowing the local agent in the spot showed up when the house burned down. Maybe as a first time homebuyer you got a good tip from your mortgage broker on who to use. Another good question is why did you buy the policy? Because it was it required by the bank or mortgage company? What about the policy limits, were they set to only cover paying off the mortgage because it was cheaper than insuring the total value? How many times since you first purchased the policy have you evaluated the risks you are paying to insure?

These are all very important questions. My professional experience preparing post Katrina income tax returns with casualty loss is that most people literally are asleep at the wheel when it comes to assessing the risks that may impact them in the future. In fact I submit it is basic human nature to avoid thinking about such unpleasant possible future events. The end result of burying ones head in the sand is invariably bad for the consumer once disaster strikes.

Post disaster hindsight reveals the complete inadequacy of the original criteria we used to select an insurer. For instance, the fact your local State Farm agent is a good guy (mine is for certain) is meaningless when the “good neighbor” refuses to pay for an insured risk. And all the accumulated advertising we’ve seen never prepared us for the very real possibility the good neighbor will force many of it’s customers to use the court system to collect on the policy as a matter of internal claims handling policy.

Insurers on the other hand know a good bit about their customers. They know your credit score for instance and will rely on a computer model to determine how your claim is handled. In a previous post on this forum I detailed how insurers spend big money on weather modeling to assess the risk they face. In short most consumers use subjective, sometimes emotional criteria to purchase insurance while insurance companies use objective criteria in how they conduct business. The gap in market knowledge between insurers and consumers is referred to in economics as Information Asymmetry, and is defined as “A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party’s lack of knowledge.”

In future posts we will further examine the concepts of Asymmetric information and how it translates into premium pricing, especially in reinsurance.

Here is a well reasoned opinion on the impact of the current legal mess and it’s impact on coast residents seeking justice.

“Katrina lawsuits: Coast residents want justiceThe Clarion-Ledger For Mississippi Hurricane Katrina victims, hope for recovery from the storm took a sickening turn with the charges lodged against attorney Dickie Scruggs.

State Farm Fire and Casualty Co. is seeking to have attorneys with Scruggs’ “Katrina Litigation Group” representing policyholders thrown off a key case because the insurer claims the lawyers have behaved unethically.

Scruggs withdrew from most of his firm’s Katrina cases after his indictment on charges he tried to bribe a judge for a favorable ruling in a dispute over legal fees.

The newly formed group, which includes members of Scruggs’ legal team, is now handling hundreds of cases on behalf of Coast policyholders in “wind vs. water” disputes, alleging the insurer failed to honor claims.

State Farm claims that Scruggs and members of his team have committed “highly unethical acts,” such as illicitly obtaining internal claims records, and have “irreparably perverted the litigation process.”Scruggs’ indictment has muddied the water for policyholders. The more cases are delayed, the longer the recovery can take – if homeowners don’t just give up or move away. About 14,902 families still are in temporary housing units in Mississippi.

In clarionledger.com’s Forums, under Katrina-related issues, Mississippi Insurance Forum, readers commiserate. Says one: “‘Ain’t life grand?’ For some people, maybe, but nothing’s grand for the people on the Coast that were ‘slabbed’ by Katrina, ‘stabbed’ by their ‘good neighbor,’ and forced to live out a horror story that even Hitchcock would find frightening.

“Life’s not going to be grand for anyone in our state until we get to the bottom of this mess … Unfortunately it’s going to take a long time – longer, I fear, that folks with valid claims can hold on.”

Mississippians have the “want to” for rebuilding. The legal disputes need to be resolved.”

“HOME INSURANCE rates are skyrocketing on Cape Cod, the islands, and in other coastal areas. Driving the increases are concerns by insurers that a major hurricane could wreak the kind of devastation that hurricanes have brought to other parts of the country. Some companies have simply stopped insuring in shore areas, forcing homeowners into the state’s FAIR Plan, the insurer of last resort.But Massachusetts need not simply accept this price spiral, because the state has options for making insurance more affordable. One is for state officials to take a closer look at the models of hurricane devastation that insurers use to justify their higher rates.

Companies hold these “black box” models closely, but a legislative commission recommended earlier this month that state officials seek access to them. The panel called for a new “independent public entity” to study the reliability of the models. Two members – state Senator Robert O’Leary of Barnstable and state Representative Eric Turkington of Falmouth – went further, calling for the state to create its own model or require that any private model be open to review by the attorney general. Such efforts make sense; rates for a product that homeowners have little choice but to buy ought to be based on defensible criteria.”

There is an informal brotherhood of those slabbed and/or destroyed. Among that brotherhood all know at least one person whose house was destroyed by wind but was only paid their flood coverage (if they had it). We are not professionally trained licensed engineers but in some cases the cause was most evident, such as in the picture of this house in Lakeshore which was also flooded but not subjected to wave action.

This is a picture of the house across the street also smashed and flooded. The window in the house was removed by the owner as they salvaged some of their contents from the interior. In both cases the contents of these houses stayed with the house instead of being swept from it like so many others.

This picture finishes the story, notice the house down the street left standing. All the homes on the street were built within a year or so of each other by the same builder. Also notice the hole in the roof of the house down the street that stood. How is it that the majority of the houses on this street stood while three houses in close proximity of one another were reduced to rubble? A tornado or mini tornado is the cause. There was a line of snapped trees that lined up perfectly with the woods across the field from the destroyed houses on this street and through to the woods on the other side. I personally know of at least one such resident who was only paid on their flood policy instead of their private wind policy. That’s right ladies and gents, the bill was on you, the taxpayers.

Today we begin with the weather forecast but not just any weather forecast mind you. First off is this story from Reuters which proclaims our property and casualty insurance rates in the US will remain high due to the massive hurricane that is surely coming to destroy us all. As a result, the article concludes our P&C rates will continue to increase. So proclaims the popular press which by the way has never met a scientific story on global warming and Hurricanes they failed to butcher.

So what’s so complicated about the long range weather forecast? Easy, these high priced models that are periodically publicly released (and butchered) aren’t really worth the paper Reuters wrote the story upon:

“A model is just that—a model. It is still based on many simplifying assumptions, with a high degree of uncertainty,” she said. “It can tell you, given where you have your insureds, what the maximum probable loss would be should a storm of a certain strength hit a certain area, but the question of frequency is more vexing.”

However, she noted that “while there is no consensus at all on climate change and the frequency of hurricane landfalls, most scientists agree that when storms do hit these days, their intensity is likely to be greater and will cause more damage.”

So here, in the National P&C Underwriter, an insurance industry trade publication, we discover a deeper truth about these climate models and as borne out by the last two Hurricane seasons which have also come complete with prediction of coastal doom; namely that weather models are notoriously unreliable predictors of when or where a windstorm may strike.

This basic fact does not stop insurers, especially those in reinsurance from paying big bucks for weather forecasting as most have their own in house forecasting units like this one. We submit that despite the limitations of weather modeling there has to be good reason the insurance industry keeps such a close eye on the weather. However, insurance seems to be one business that profits handily even when they completely miss on the extended forecast like these past two years.

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